My personal blog about international trade, public policy & politics, pop culture, and stuff that probably interests only me

Monday, April 9, 2012

"Export-Oriented America"

GMU's Tyler Cowen has a new article in the American Interest that explores a lot of the issues that I've been covering here for the last few years. Cowen first provides three reasons to think that the United States could become an export powerhouse in the next few years (hint: none of them involve China's currency or President Obama's National Export Initiative):

First, artificial intelligence and computing power are the future, or even the present, for much of manufacturing.... Factory floors these days are nearly empty of people because software-driven machines are doing most of the work....

The more the world relies on smart machines, the more domestic wage rates become irrelevant for export prowess. That will help the wealthier countries, most of all America. This logic works on both sides. America is using less labor in manufacturing, but China is too, even as its manufacturing output is rising. The fact that Chinese manufacturing employment is falling along with ours means that both our higher wages and their lower wages are becoming less relevant for the location of manufacturing decisions. The less manufacturing has to do with labor costs and relative wage levels, the greater the comparative advantage of the United States....

The second force behind export growth will be the recent discoveries of very large shale oil and natural gas deposits in the United States. Come 2030, the United States may well be the new Saudi Arabia of energy markets. We have new fossil fuel discoveries to draw upon, enough to fuel this country for decades, and there is plenty of foreign demand for those resources....

[T]he third reason why America is likely to return as a dominant export power: demand from the rapidly developing countries, and not just or even mainly demand for fossil fuel. As the developing world becomes wealthier, demand for American exports will grow. (Mexico, which is already geared to a U.S.-dominated global economy, is likely to be another big winner, but that is a story for another day.)

In the early stages of growth in developing nations, importers buy timber, copper, nickel and resources linked to construction and infrastructure development. Those have not been U.S. export specialties, and so a lot of the gains from these countries’ growth so far have gone to Canada, Australia and Chile. Usually American outputs are geared toward wealthier consumers and higher-quality outputs, which is what you would expect from the world’s wealthiest and most technologically advanced home market. To put it simply, the closer other nations come to our economic level, the more they will want to buy our stuff. Indeed most of those nations are growing rapidly, so we can expect their attentions to shift toward American exporters. The leading categories of American exports today—civilian aircraft, semiconductors, cars, pharmaceuticals, machinery and equipment, automobile accessories, and entertainment—are going to be in the sweet spot of growing demand in what we now call the developing world....

Just as Canada and Australia have prospered over the past ten years because their specialties matched Chinese demands, the United States is likely to be the bigger winner in the next ten years as Chinese (and other) demands mature. It’s a trend that has clearly already begun. In 2010, for instance, American exports to China rose by 32 percent, according to a 2011 report by the U.S.-China Business Council. Furthermore, American companies, with their practicality and marketing expertise, will be well positioned to convert scientific innovations from Chinese labs into new commercial products once such innovations start to arrive in large numbers.

So far, so good. Cowen goes on to explain that America's new export strength "will resurrect the United States as a dominant global economic power," helping to resolve the United States budget, trade and diplomatic problems. I especially like Cowen's optimism that "[t]he opposition to free trade as it existed during the 1980s, and which led even Ronald Reagan into auto protectionism, is almost gone, and these pro-export developments mean that it won’t come back anytime soon." I wonder, however, whether this new US support for free trade could be undermined as US exports are increasingly subject to trade remedies actions in key foreign markets like China - ironic, considering that the United States has always been one of the biggest users (and defenders) of trade remedies to curb foreign imports. On the other hand, maybe it will result in a significant change in US trade remedies policies in forums like the WTO, seeking to impose, rather than rebuff, more stringent disciplines on nations' application of trade remedies measures.

That interesting hypothetical aside, Cowen goes on to explain the big downside to the United States big export surge:

The new export-based prosperity may not translate into higher wages for everyone, or even most people, in the United States. Skilled laborers who work with smart machines or even hold advanced managerial jobs will continue to make big gains, as the numbers have been showing for some time. Capital will do well too, especially if it is geared toward export success.... [S]ignificant segments of the American workforce are likely to continue suffering falling real wages, even in a time of rising export prowess.

As the number of American jobs in manufacturing has fallen dramatically, it is often forgotten that American manufacturing output has continued to rise, even during some slow times. In the past decade, the flow of goods coming from U.S. factories has gone up by a third as capital has increasingly become a greater share of input over labor....

[W]e’ll probably see a lot of the American workforce accept lower wages. A lot of American exporters are already experimenting with a two-tiered wage structure, with significantly lower wages for incoming workers....

To some extent, these trends resonate with the old saying, “Live by the sword, die by the sword.” Jobs in the export sector face intense competition, precisely because U.S. companies are increasingly selling into a global market, and that means wages in this sector cannot be guaranteed to rise. They might, and they might not, depending on how creative, efficient and well managed we are. Services, in contrast, are often produced inefficiently, but the jobs are more extensively cocooned within a protected domestic market, often based on government privileges and market-distorting third-party payment schemes.

Although I agree (and have argued for a long while now) that US manufacturing exports are not some magic bullet for the US labor market, I'm inclined to quibble a bit with Cowen's repeated characterization of the US services sector as "cocooned within a protected domestic market." While that's certainly true for government jobs and certain health care and education jobs, it's definitely not the case for an increasing number of services jobs - for example in medicine, engineering, IT and, yes, even law (trust me) - that totally dominate in the face of real and growing global competition (precisely because US services providers are much more "creative, efficient and well managed" than their global counterparts). Cowen seems to imply later (see below) that a such a dynamic services sector is to be expected in the coming years; I'd argue that, in this respect, the future is indeed now (and it's not nearly as dystopian as Cowen makes it out to be).

Nevertheless, Cowen next explains that even his overly-bad news comes with a silver lining:

There is the prospect of a better career path, accompanying future export gains, that stands a chance of making life less grim for the working class. Some of the new technological and export-related breakthroughs will consist of making education and health care more affordable, often through software and smart machines that bypass the current credentialized control of those fields. Imagine getting an online medical diagnosis from a smart machine like IBM’s Watson, or learning mathematics from an online MITx program or one of its successors. The American poor and lower middle class will have considerably greater opportunities, at least if they are savvy with information technology and disciplined enough to take advantage of these new free or cheaper goods. Of course, this will not come close to helping everybody. These internet tools reward the self-motivated, who will be disproportionately well educated, even if their parents lack higher education, wealth and connections. Many of the rest will still fall by the wayside.

Even American earners who must cope with stagnant wages will probably reap big gains from new opportunities to lower their basic living expenses. Imagine a family earning $37,000 per year that has much cheaper education and health care costs, thanks to government benefits and internet-based innovation. No one will be tempted to call such households wealthy, but they won’t fit the standard measure of poverty either. They will have positive experiences in their lives and lots of free and nearly free goods....

The internet will continue to make it easier for small businesses to export, but many of the growth areas, including fossil fuels, heavy equipment and cars and other high-tech items will remain the province of big business. America will likely see a new age of corporate titans selling their products and services to the entire world, and the world as a whole will be far wealthier than in times past. The wealthiest American earners will be very wealthy indeed, even by current standards. Due to their export activities, they will take an increasingly global perspective, and they will give away lots of their money, just as Bill Gates has expanded his philanthropy abroad.

Cowen concludes by predicting that the growing divide between the hyper-productive and over-protected will grow to dominate our society and our politics:

These days, this old portrait of the two-tiered economy, originally applicable to a developing economy, may be re-emerging for the United States. We had not thought through seriously enough the possibility that the world’s most technologically advanced economy would, over time, develop persistent and indeed growing productivity differentials across sectors. It clearly has, and the social and political frictions this has caused now dominate our politics—or soon will.

One way to understand this is to note a neglected implication of Moore’s Law for computer processing speed, namely that its use in the value-added process benefits some economic sectors much more than others. In this case the static sector consists of the protected services (a big chunk of health care, education and government jobs), and the dynamic sector is heavily represented in U.S. exports, often consisting of goods and services rooted in tech, connected to tech, or made much more productive by tech innovations. Piece by piece, bit by bit, we Americans are replicating the two-tiered developing economy model, albeit from a much higher base level of wealth and productivity.

A battle between the "static sector" (e.g., public sector and industrial unions) and the "dynamic sector" (e.g., industrialists, non-union workers and professional services)? Is this really, as Cowen contends, the distant future of American politics?